Monday, March 25, 2013

Is Retirement History?

Joseph F. Coughlin, director of the Massachusetts Institute of Technology AgeLab, wrote a comment on the Big Think blog, Is Retirement History? (h/t, Suzanne Bishopric):

Associated Press reports that two Americans are somehow still receiving Civil War veterans’ benefits. Although I’m guessing that a good deal of the media coverage devoted to this discovery will deal with the long-term economic costs of war, I’m fascinated for another reason: the Union Army plan was the first major, federal-level pension program in the United States. Today, as we wonder whether we’ll be able to continue to afford Social Security and Medicare in the decades to come, it’s astounding to discover that the original American entitlement program is still alive, and still paying out.

For those of us not currently reaping Civil War benefits, a little background: the Union Army pension originally covered those injured in battle, and in the late 1800s the program expanded to include veterans who became disabled off the battlefield as well. “Disability” was defined to include old age, and eventually veterans as young as 62, as well as their widows and children, could claim payments. Importantly, in the case of the two remaining pension recipients, children with disabilities would remain on the pension rolls even after they became adults. By 1900, the Union Army pension was the most widespread form of assistance to older adults in the United States, paying out to a quarter of the population 65 and over and accounting for almost 30 percent of the federal budget.

Even more interestingly, the pension provided a natural economic experiment: only some adults received payments, and their behavior could be compared with those, such as Confederate soldiers, who didn’t. My former MIT colleague Dora L. Costa (now at UCLA), after accounting for such variables as the health of the retiree, discovered that as of 1900, workers were vastly more likely to retire if they had the extra income boost of a Union pension. (More about this study, as well as most of the other Civil War-related information I’ve cited here, can be found in Costa’s incredibly detailed and exceptional book The Evolution of Retirement.)

The idea that people would retire if they could afford it may not seem extraordinary now, but in the years leading up to 1900, our modern concept of retirement wasn’t fully formed. Many delayed this step for as long as possible, in part because they would have no choice but to move in with their kids or extended family once their cash flow dried up. But around the turn of the century, retirement began to change. In addition to the Union Army pension, private pensions became increasingly common. More and more retirees were able to afford to live apart from their kids. Leisure started to become cheaper. And, in ever-increasing numbers, people retired who didn’t need to, in the sense that they were physically capable of work. Eventually, the idea that a “worker, after years of productive effort, has earned the right to rest” – even if that worker didn’t physically need it – would help inform the first iteration of Social Security, and, in turn, our current conception of retirement.

Today, little is known about the two remaining recipients of Union Army pensions, except that they live in North Carolina and Tennessee, and they’re almost certainly children of women who married Civil War veterans much older than them in the 1920s or ‘30s. Today, they each draw 876 dollars per year from federal coffers. It’s a price I’m happy we’re paying, if only to serve as a reminder that the way we live our lives is more malleable than we think. Whether we expect to go to high school, college, retire, or do anything else because we see our peers doing it, it’s always a good idea to stop and ask ourselves why. In the case of retirement, it’s eye-opening to discover that our current narrative is tied to a war that concluded 148 years ago.

As with many concepts that we now take for granted as a reality seemingly dictated by the laws of physics, the idea of retirement is a social construction that is subject to change. A combination of factors now challenge today’s notion of retirement. The changing nature of work, economic necessity, smaller and fragmented families, the capacity of public and private pension providers to ensure income that enables 20-plus years of not working for income as well as the desire of many retirement age people to continue working are eroding our expectations of what retirement is and should be. Sometimes big change happens slowly and is barely perceptible at any one moment. Retirement, as we know it today, is history. A new story is emerging – a narrative that will change how we individually plan and behave as well as the government and business institutions that are built to support the retirement we once knew.

True, retirement as we know it today is history because of all the factors Coughlin outlines above but there is also no denying Americans are bracing for a retirement crisis. Longer life expectancy, historic low bond yields, low investment returns, the demise of define-benefit pensions, higher cost-of-living and an ongoing jobs crisis are basically condemning the current and future generations to lifelong job insecurity and pension poverty in their not-so-golden years.

The Employee Benefits Research Institute (EBRI) has today released its report highlighting the intense state of insecurity American workers are experiencing as they look forward—with ever increasing trepidation—to a retirement without sufficient money to see them through.

According to the data, American workers have very good reason to be afraid.

Per the survey conducted by EBRI, 57 percent of American workers currently have less than $25,000 in total savings and investments (excluding the value of their homes) put aside for retirement. In 2008, that number was 49 percent. As a result, almost 50 percent of the nation’s workers are either “not too confident” or “not at all confident” that they will have sufficient resources to cover the bills in their retirement—while many who are feeling a bit better about the future may just be kidding themselves.

What’s more, it’s getting worse every year.

In 2009, 75 percent of the nation’s working class had managed to put something away for retirement, even if the amount was insufficient to take care of them in a time of increasing prices and rising life expectancy. Today—just four years later—that number has fallen to just 66 percent of workers who have been able to set something aside for their sunset years.

These dramatic numbers should come as a surprise to nobody as the statistics have long made clear how badly worker income has stagnated in America since the 70’s.

As workers have increasingly struggled to pay their current bills, due to employee earnings remaining static at a time where the high end of the income scale rose to unprecedented heights, it has become all the more difficult for these people to set aside money for their retirement. Further, the decline of the private sector union movement and the end of the defined benefit retirement plans that were once provided to workers as a part of their employment package have only served to make the problem worse.

If you are somehow unaware of the historic stagnation in the wages paid to the American worker since the 70’s, these bullet points, compiled by the Center on Budget and Policy Priorities and based on the Census survey and IRS income reports, should open your eyes:

The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.

Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.

The income gap between those high up the income ladder and those in the middle and lower rungs — while substantial — did not change much during this period.

Beginning in the 1970s, economic growth slowed and the income gap widened.

Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly.

The concentration of income at the very top of the distribution rose to levels last seen more than 80 years ago (during the “Roaring Twenties”).

Wealth (the value of a household’s property and financial assets net of the value of its debts) is much more highly concentrated than income, although the wealth data do not show a dramatic increase in concentration at the very top the way the income data do.

The point is further graphically made by the following CBO chart (click to enlarge):

As for the availability of the retirement plans that were once provided in return for years of service to one’s employer, the ERBI study notes that, in 1979, twenty-eight percent of American workers were the beneficiaries of defined benefit programs which guaranteed them an income from the day they retired until the day they died.Today, that number is just 3 percent.

And then there is the decline of the private sector union movement that, in 1970, saw membership peak at 17 million Americans holding union cards. Today that number is just 7.2 million workers.

As all of these worker punishing factors began at roughly the same time as millions of Americans who are now reaching the age of retirement would have begun saving for their non-working years, should anyone be surprised that the average American is now facing a longer retirement without anywhere enough money to pay for it?

Still, what continues to amaze are the many Americans who will find themselves facing true economic disaster as they enter retirement and yet have, these many years, supported the policies of politicians that cheered the income inequality that has created this crisis as somehow being the true expression of American style capitalism. Worse still, these are the very politicians who now seek to cut social security benefits—already insufficient to cover the true costs of retirement—and Medicare.

Soon, millions of Americans will more fully understand the dreadful price to be paid for having backed the wrong horse as the country is left to deal with a serious senior crisis brought on by two generations of employers unwilling to properly compensate workers for their contributions and public policies that rewarded this greed.

You see, while Sarah Palin and friends were quick to declare legislation designed to solve a serious social problem (yes, I’m talking about Obamacare) as the coming of “death panels”, the true death panels—the faceless men and women who formulated the corporate greed policies that will send our seniors into retirement completely unprepared—have been at work in America for many years.

One of the greatest tragedies a decent society can experience is the abandonment of its elderly. We have set the stage for that tragedy to play out in America through policies that have denied millions the opportunity to properly save for their retirement.

The question is, what will we do now?

Unfortunately, nothing is being done to address America's new pension poverty. Both parties continue to pander to the financial elite, giving them tax breaks, bailouts and other forms of government subsidies, but nothing significant is being done to address the ongoing jobs crisis and the looming retirement crisis.

However, I'm no doom and gloom cynic, far from it. I'm bullish on America, think it will continue to lead the the world in the coming decades, but bitter partisan politics threaten to crack the foundations of its democracy and if politicians don't come together to hammer out bipartisan solutions, they will jeopardize the country's long-lasting economic prosperity. And a weak America isn't in anyone's best interests.

Below, radio talk show host, Leslie Marshall, discusses the survey just released by the Employee Benefit Research Institute revealing that 57% or the people nearing retirement have less than $25K in savings, and 28% have no confidence they'll have enough to retire. She speaks on Megyn Kelly's "America Live" (FNC 3/19/13), along with Melissa Francis, and Chris Plante.

Interesting discussion but some statements are factually wrong and totally biased. As I stated in a recent comment, think it's high time the United States does the unthinkable -- expand Social Security to bolster retirement benefits for all Americans and adopt the same management and governance standards as the Canada Pension Plan Investment Board and other large Canadian public pension plans.

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I am an independent senior pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest. Please remember to support my efforts by clicking on the ads on the blog but more importantly by contributing via PayPal clicking on the buttons below. Anyone can contribute any amount at any time (all tips are greatly appreciated) but institutional investors are kindly requested to support this blog via an annual subscription of $500, $1000 or $5000 CAD (third option includes specialized consulting mandates). For all inquiries and comments, email me at LKolivakis@gmail.com.

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